Steelmakers, from global integrated majors to regional operators of electric-arc furnaces, at times remain hesitant to embrace the enterprise resource planning (ERP) software systems that have been widely adopted in discrete manufacturing and even in some other process industries, notably petrochemicals. Thats not to say that steel mills are averse to cutting-edge information technology (IT). Indeed, a mill in the United Kingdom recently employed a latest-generation risk-management system to plan and execute a plantwide maintenance turn and was even able to complete the project early.

Other mills are increasing their use of hedging to offset commodity price risk for raw materials and energy. Chicago-based CME Group Inc. confirms growing business among commercial customers for its futures contracts. And in a major vote of confidence for commodity exchanges, New York-based INTL FCStone Inc. has taken a controlling equity stake in Cleartrade Exchange Pte. Ltd., a fast-growing Singapore-based commodity market operating globally.

Steel industry leaders broadly agree that their industry has not embraced enterprise IT as enthusiastically as other sectors of the economy, but they also note that steel moves on a different investment cycle than does discrete manufacturing or other process industries.

There will continue to be evolution in hedging for raw materials, said Thomas Danjczek, president of the Steel Manufacturers Association, and for my members the second- or third-leading cost component is energy, and they can hedge that. But for the bigger enterprise-wide packages, to date the value proposition for those initiatives, as evaluated by management of my member companies, has just not been there. The derivative market, the people who are promoting these tools and techniques, has to do a better job of selling them.

Danjczek noted one important reason for that. Our industry works on such a small margin, maybe 4 percent on invested capital, that we cannot afford to leave anything on the table, he said. There are lots of ways of managing risk: One is equity investment in the supply chain. Another is debt restructuring. The question on any initiative is very simple: What can I do to improve the fundamental profitability of the company? The case for the big software packages has not been made in that context.

The top two ERP providers, SAP Inc. and Oracle Corp., have some activity in the steel sector, but it is not a major business segment for either. Similarly, major process-control companies such as Burlington, Mass.-based Aspen Technology Inc. and London-based Invensys Plc, parent company of Invensys Foxboro, also have mining and metals groups, but they are predominantly active at mines upstream of the mills.

Several multi-client studies by different global consultancies over the past two years identified the steel industry as a laggard in the adoption of ERP and commodity trading/risk management (CTRM) software. That may be a good thing, according to some senior industry officials. One noted, The aluminum industry is 20 years ahead of us in CTRM--they have all these tools and hedges and risk management and everything--and they are a disaster.

Many software suppliers say they are seeing adoption on an islands-of-automation basis, either to support supply efficiencies, fine-tune risk management or treasury functions, or handle specific projects or initiatives. In such discrete chunks, new approaches to automation and systems integration are more manageable.

A case in point was the maintenance turn at a blast furnace in the United Kingdom, one of the largest in Europe. The mill agreed to provide some information but declined to be named. Having suffered cost and schedule overruns on previous turns, the mill hired an outside consultant to shepherd the process; the management firm, in turn, licensed a risk- and decision-analysis system from Ithaca, N.Y.-based software company Palisade Corp. called @Risk.

According to the mill, the business assessments were conducted on the companys entire commercial section to assess the impact of the blast furnace outage on the company. The business assessments identified key risks to the business--commercial, financial, technical and logistical--and a process model was designed using @Risk to forecast production throughput at the business sites incorporating the effects of those risks. This was then used to provide management with guidance on steel stock build requirements, allowing commercial and production decisions to be made and tested.

The project was a major success. The furnace reline was completed with a total outage of 68 days and 9 hours, which was within the extremely aggressive 70-day window. Each day of lost production would have cost a significant amount, so speed was paramount.

Most of our work in the steel sector is project management, said Randy Heffernan, vice president of Palisade. We are engaged because a project went over time or over budget in the past, and they know they cant do that again. In countries outside the United States and Canada, it is also common to have some government involvement, meaning more entities in the decision process.

The software uses Monte Carlo simulation, which is most common in financial planning. Traditionally, we make assumptions to estimate uncertain factors, Heffernan said. These individual point estimates are added up and you get an answer. Most often you get three: best and worst case, and most likely. What Monte Carlo does is to build in the likelihoods for each variable then samples them through many iterations. It is a much better way of describing probabilities.

One of the most powerful uses of such simulations is that variables or inputs can be ranked, Heffernan said. You can tell which variables have the most effect on your outcome. Often, those are not intuitive in the regular models. For example, if the worst case for one variable is highly likely but it would cost the project only one day, then it would be less important than trying to control for a variable with a lower probability but a more severe worst-case scenario.

In trying to develop comprehensive risk management tools for the steel sector, Youngjin Chang, director of metals research and product development at CME, said that her exchange examined how the steel supply chain is similar to and different from other process industries. In contrast to oil, which is very linear--basically one input--steel is much more chunked with many inputs: ore, scrap, coke, gas, electricity, she said. That makes the ideal of a virtual steel mill, a completely liquid market in risk management for all the inputs, much more desirable, but also much more difficult.

Some of the tools we have out in this segment are very new, and we are encouraged by their growth, Chang said. But we are thinking about this as a 10-year project, and we have to be patient as financial and commercial users get familiar with the tools. The economy overall is picking up, but not yet so much in steel and that adds a further level of risk and volatility. She noted that hot-rolled coil contracts are seeing record volume and almost daily trading, the scrap contracts launched last fall are growing in line with expectations and an iron ore contract was just launched on Globex. We are already seeing some volume and open interest on that.

Chang added, with some satisfaction, that the early adopters, the pioneers, are starting to see the fruits of their efforts. I heard just recently from a commercial market participant (a real user, not a speculator) that their first trial hedges worked as they hoped and they look forward to building up to a 100-percent hedged position over time. We are also getting calls for information from some commercial prospects saying they lost business when a competitor could offer a better deal because they could lay off price risk by hedging. People at all stages of the steel segment are looking at what they can do to stabilize business and profitability.

Manav Garg, founder and chief executive officer of Bangalore, India-based Eka Software Solutions Pvt. Ltd., is alert to those realities. The steel industry does not have much money yet to put into ERP and CTRM solutions, but those opportunities will come, he said. We see coal already getting more interested now that shale gas is putting pressure on their profitability. The whole energy sector is affected. The coal sector traditionally had underinvested in supply-chain automation. So we expect to see the same developments in steel.

One of the complications, Garg noted, is that for those steel companies that have invested in ERP, those systems often come with CTRM functions. There are many cases where the big mills have tried to do CTRM from their ERP platform, and they have not been happy with the results. The ERP platforms are optimized for certain corporate functions, while the dedicated CTRM systems are optimized for things like hedging, invoicing, mark-to-market calculations. People are starting to prefer dedicated systems that can link up to an ERP platform.

Those fits and starts in hedging and risk management are playing out all over the world and, notably, attracting growth capital. INTL FCStone, a provider of execution and advisory services in commodities, currencies and international securities, in May acquired immediate voting control of Cleartrade Exchange along with the right to acquire up to 90 percent of equity interest over the next five years. The value of the deal was not disclosed.

Cleartrade, a recognized market operator regulated by the Monetary Authority of Singapore, is a futures market for commodity futures and over-the-counter cleared derivatives. It was founded only in February 2010 and began operations in March 2011, when it received its regulatory license, and already has more than 30 trading members. It offers 43 commodity contracts, electronic connections to London-based LCH.Clearnet Group, Singapore Exchange Ltd. and NOS Clearing ASA, as well as price distribution via desktop and mobile devices.

With this investment by FCStone, we have broadened the structure of the exchange and made it attractive to a wider range of clients, Richard Baker, chief executive officer of Cleartrade, said. The real challenge now is building liquidity across all the instruments. We are keen for Cleartrade to be known as the market that gives good access to spreads for all inputs and outputs to the steel business.

In that spirit, Richard Heath, head of product at Cleartrade, said that mills are slowly getting into the trading and hedging markets. They have been very vocal about the squeeze on input costs and the flat-to-declining prices for their finished products. Indeed, the vast majority of our users in the steel segment are real users hedging their exposures.

Scott Sweden, head of business development for metals at Cleartrade, said that pressure is coming from end users. In Europe, all the end users are hedging their risk. They may not be coming into the brokered market directly, but they are hedging through banks and other financial intermediaries. We have seen this especially since late last year. We have also seen the same in other steel end-use markets, like power and construction.

He acknowledged that those guys are keen, but the mills are not. However, we are starting to see some of the mills in northwest Europe develop risk statistics; some of their treasury departments are starting risk management teams. They are still in the information-gathering stage, trying to get their arms around it. Last year, their customers were twisting their arms. This year, they are actively investigating.